Tuesday, July 21, 2009

OBX Economy--The Myth's?

Sometime near the middle of 2007, the Outer Banks Sentinel wrote an editorial regarding the looming economic crisis and observed "local bankers are now worrying about where their next interest payment is coming from". At least more than one local banker disagreed with this remark, and in 2008, when the foreclosure tide began to rise, the Sentinel took note of the fact and even mentioned those bankers who had disagreed with the earlier assessment.

Since the housing boom lifted off slowly around 2000, there has been much debate about the over-development of the region, both in regards to the large rental homes east of the major arteries, and the commercial projects that followed. Anger and criticism has been directed at Realtors, builders, and developers. I know, because during the entire time I was either a Board member or a committee member within the Outer Banks Homebuilder's Association. I still reside there today, as a member of the Legislative Affairs Committee.

The foreclosure spree got underway in earnest locally during 2008. However, most of the properties taken were either commercial buildings where tenants vaporized, or speculative homes financed by local banks and building supply companies; in essence, commercial loans. About 300 homes were foreclosed upon in 2008 locally, and the typical price range was between $300,000 and $400,000.

During most of 2008, national mortgage lenders were failing or struggling, the Federal government trotted out stop-gap measures to save mortgages, and banks retrenched. In all of the confusion and flow of rescue funds, foreclosures on residential properties were stalled. In 2009, the dust had settled, the rescue programs were mostly in place, and lenders began to foreclose on the "lost causes".So, who is getting hurt? The above chart shows the distribution of assessed values of bank owned (foreclosed) property that has sold in 2009. It does not indicate the assessed values of foreclosed properties listed but not sold, so it is not inclusive in telling us exactly where the foreclosures are occurring. I am working on gathering that data for another post. The information was gathered from a report generated by David Watson at Southern Shores Realty.(His is raw data, the charts and interpretations are my own). On the left side are the raw numbers of foreclosed homes (the y-axis), and across the bottom (the x-axis) are the assessed values of the foreclosed properties. I chose assessed values rather than sale price because they are more indicative of whether a house is a year round residence or a vacation rental home.

What the data does tell us is the current economic environment is definitely hitting the middle class hard. Of the 73 foreclosed properties that have been re-sold, 54 were priced at under $550,000 and were"west-side" properties. In fact, as the chart demonstrates, more than 50 of these homes were assessed at less than $400,000. The average assessed value for all bank sold properties was $411,000, and that includes the eight homes assessed at $800,000 to $2,000,000+. To narrow the data set further, 32 of these homes were in the Kill Devil Hills-Colington Harbour market area, where the vast majority (26 of the 32) were assessed at under $300,000.

Thus, contrary to what many predicted, it isn't just the rich, out-of-town rental machine owners who are taking it on the chin. Virtually every foreclosed home sold under $400,000 represents a local resident who lost their dwelling.

It will take some time before we know what the economic effects of foreclosures will be on the investment home owners. For starters, not many are selling at any price. And, when they do, they are often going for 60% or less of assessed value, especially in Corolla. I suspect one would see a similar trend on Hatteras Island, which is excluded from this data set. An early indication of sale price seems to demonstrate that west-side properties in Corolla were significantly over-priced and that their rental history will not carry the original sales prices. Lacking rapid appreciation so that a home can be flipped, buyers now are seeking cash flows that at worst are neutral (based upon rental history).

There has been a fair amount of anger directed against local interest groups, such as the Homebuilder's and the Board of Realtors. Included in this category were developers of both residential and commercial projects that followed the increase in home building. What we have witnessed locally is that our economy is tremendously dependent upon real estate related profession. In terms of the income of the local workforce, I would feel comfortable stating that real estate-related salaries far exceed those incomes generated by tourism alone (sales clerks, waitresses, hotel staff. etc).

Those who believe the wealthy, McMansion homeowners will get their comeuppance in the current crisis should think twice. I promise I will supply the data on how many of those homes have been taken back by lenders, but we should not forget that these homes were investments, often obtained with little or no money down. While a foreclosure may ruin the credit of these borrowers for a few years, they will not likely lose their primary residence, cars, or even their jobs. On the other hand, all those sold foreclosures under $300,000 represent a solidly middle-class family, and one can assume with some certainty that the foreclosure had something to do with lost wages from the downturn in construction and real estate.

If I were the local newspapers, I'd focus just as hard on the local population losing their homes and a lot less on the "bankers" who "over-developed" the Outer Banks. And, if you think you are immune from these type of job losses, remember its the blue collar and middle-class workforce that keeps all those year 'round services going; local stores, medical facilities, the schools, restaurants, and other businesses. Their spending power makes the difference in many cases between an October closing and a 12-month schedule.

Secondly, each time a foreclosed home is sold, a new assessed value is created. So far, about $30 million in foreclosed homes have been sold in 2009. If those homes sold for 80% of assessment, $6 million in taxable assets have disappeared. Add to that the depressed sales prices of non-foreclosed homes and the end result is--someone (you and me) is going to either pay higher taxes or suffer from government cutbacks in services.

We can't afford the "us and them" mentality that pervades the beach; the residents versus the income-producing property owners. We are all in this together, and it takes both sides to run this local economy.

Finally, our political leaders need to seriously consider diversifying our employment base. Tourism will always be King, but there is room for other economic activity to supplement our economy. Expansion of the arts community, a four-year college, culinary schools, and attracting high-tech workers not dependent on physical location (programmers, risk analysts) are some areas of focus. More medical facilities to support a retirement community is also a good idea. And, we aren't done with tourism. We don't need to pack more folks in here during the summer, but the Tourism Board needs to focus on things like birding, kayaking, and food events to draw weekend and short-term visitors in the fall season, along with the usual fishing enthusiasts. Hiring another out-of-town formulaic Tourism Director will not likely result in the changes we need to smooth out our economy.

About Me

Arrived on the OBX circa 1993. Spent 30 yrs as a commercial banker, but have written comic strips, editorials and other fun things in the past. Married 25 years to the same lovely bride..pet owners also. Hustle mortgages and work with Rob Morris on the Outer Banks Voice online news site.